A corporate tax code for a different century
Big business is lobbying for a major cut in the corporate income tax rate, and both President Barack Obama and key congressional leaders are on their side. But the evidence that a rate cut will boost the economy is weak. What’s needed is comprehensive reform that includes a simpler, fairer and more transparent corporate tax code. But more on that later.
Consider what President George W. Bush‘s Treasury Department said in a report in 2007: big countries, such as the United States, receive far less economic benefit from lower corporate tax rates than smaller countries do. For large countries, cutting corporate tax rates “would result partly in increased capital inflow and partly in lower world interest rates.”
While other large countries have cut their corporate tax rates since then, lowering the U.S. rate would just encourage other countries to go even lower. Since we are cutting spending in the very areas that build wealth – education, infrastructure and research – a corporate tax rate cut would increase the pressure for further cuts in those areas, making us poorer.
The RATE Coalition, a group of 23 businesses and two trade associations, is among leading advocates for a cut in the corporate income tax rate from the current 35 percent. But it also wants that cut to be a part of fundamental reform.
A cut of 10 percentage points would increase economic output by 1 to 2 percentage points, the coalition says on its website, citing a study by economists Roger H. Gordon of the University of California San Diego and Young Lee of Hanyang University in Seoul. But Gordon told me that while the paper shows that “lower corporate tax rates are associated with more rapid economic growth,” that point comes with a caveat.
“We found these results only … for non-OECD (poorer) countries,” he emailed – there was no statistical relationship between lower corporate tax rates and faster economic growth among OECD countries, a coalition of 34 modern states spanning the globe and including the United States.
Ten of the RATE members have made detailed tax disclosures to shareholders, allowing Citizens for Tax Justice to compare their tax rates on profits earned in the United States to their rates on overseas profits. Its recent study showed that five of the 10 RATE members paid higher rates on their U.S. profits than on their foreign profits in 2008 through 2010. The other five paid lower U.S. tax rates.
Add up the figures from all 10 companies and their average U.S. tax rate was just 0.88 percentage points higher than their non-U.S. rate. That is not much of a difference, either to the companies or the U.S. economy.
The RATE Coalition has two chairs, one from each party, each with strong Washington ties. Its spokeswoman offered Democrat Elaine Kamarck, a public policy lecturer at Harvard’s John F. Kennedy School of Government, to answer questions. Kamarck said that the enduring economic doldrums and election year politics this year “almost inevitably lead to a big tax reform debate in 2013.”
“We see an interesting political consensus,” she said. Corporations want lower rates, the government needs more revenue and since the 1986 Tax Reform Act the corporate tax laws have become overgrown with favors, especially for multinational companies. Getting lower rates, she said, has to include removing many favors to level the playing field so profits are taxed evenly, not more for some industries and less for others as today.
Significantly, the RATE coalition, one of several corporate coalitions competing to shape changes in tax law next year, includes associations of retailers and railroads, both of whose tax issues are almost entirely domestic. Some of its members have spoken against the proposed tax holiday for bringing home untaxed overseas profits. The coalition does not oppose any repatriation deal for multinational companies, but says such a deal should be debated only in the context of fundamental reform.
Kamarck said she agreed with one of the major themes of this column – which is that our tax code was built for the national, industrial, wage economy of the 20th Century, creating problems for the global, services, digital economy of the 21st Century.
So why is the RATE Coalition not first promoting fundamental reform, a tabula rasa approach, and only then talking of tax rate cuts? That, she said, is just not politically doable in the next two years. Let’s hope she is wrong. Washington has done it before, in 1986. Why not again?